Friday, 31 July 2015

This is just a short
gripe about some of the commentary around the Labour leadership
contest. So many who write about this express their puzzlement about
how someone from the left of the party can suddenly appear to be so
popular. This can only mean, they suggest, that the Labour party
membership must have moved to the left. (For example this,
from the FTs Jim Pickard.)

This mistake
reflects something that Paul Krugman has remarked upon in the US: the
tendency of commentators to define the centre as simply today’s
mid-point between the two main parties. So as Labour moves towards
the Conservatives, according to this way of looking at it the centre
also moves to the right.

Now if that is how
you want to define the centre, so be it. Such is relativistic view is
very post-modern, I guess. But when that idea is then used to say
that Labour party members must have moved to the left, its
limitations become self-evident. In reality all that might be going
on is that the views of Labour party members have not moved at all,
but they have become left behind as Labour MPs and other prospective
leaders have moved to the right. I think we have clear evidence that
this is more likely to be what is happening. [1]

The most obvious
example is the welfare bill, and Labour’s shameful
decision to abstain on this. But another that is close to my heart is
austerity. Talk to some, and being anti-austerity has become
synonymous with being well to the left. Of course in reality it is
just textbook macroeconomics, but if we stick to measuring everything
on a left right axis, then remember that it was only as far back as
2009 that the need for fiscal stimulus rather than deficit reduction
was the position advocated by a centre/left Labour party in the UK,
and the Democrats in the US. It cannot be surprising, therefore, that
among a relatively well informed electorate that is the Labour party
membership an anti-austerity position is still seen as a sensible
policy. With an extreme relativistic view you could say that by
sticking to this position these people have moved to the left, but
please don’t appear surprised that this has happened.

[1] It is equally
fallacious to think that those who vote for Corbyn agree with every
one of his policies. Some of his popularity may be a form of protest
not just at the policies of his competitors, but also their style:
see the clip in the middle of this typically amusing article
by Mark Steel.

Thursday, 30 July 2015

I have an image in
my mind. Its a bus running downhill, and its brakes have failed.
There are four men in the front cab. The two men in the middle are
both trying to control the steering wheel to keep the bus on the
road. The man to their right has control of the accelerator, and is
pushing on the gas hoping this will crash the bus to the right. The
fourth man to their left controls nothing, but as his pleas to stop
pressing the accelerator fall on deaf ears, he begins to wonder
whether it would be better for the passengers to grab the wheel and
crash the bus to the left. The three other drivers do not agree on
very much, except that it is all the fault of the guy on the left,
and now appear to be thinking about throwing him off. As the bus
hurtles downhill swerving from side to side, its passengers are
battered, some injured, and a few are jumping off.

I do not need to
explain the symbolism. I tried to change the image to explain why the
man on the right refuses to stop pressing on the accelerator of
growing primary surpluses, but gave up because the real reason is
that he wants to crash the bus anyway. (The argument that the
Eurozone’s rules do not allow debt write-offs is just nonsense.)
Otherwise I think the image works well. The two men in the centre
represent Tsipras and maybe Hollande. Hollande is saying that if only
you would let me have the wheel (‘structural reform’) all would
be well, but in truth the main reason the passengers are being
injured (unemployment and welfare cuts) or are jumping (migration) is
the speed of the bus.

The central question
is whether the men in the middle are delusional. By keeping the Greek
economy on the road that is the Eurozone are they only going to
prolong
the agony with the same inevitable crash which is Grexit?

There is only one
reason for optimism that I can see, although it assumes yet further
reductions in Greek living standards. The hill the bus is travelling
along will begin to flatten out and the road might even start to rise
as Greece becomes more competitive in terms of price. I outlined here
why that has not yet boosted the Greek economy to the extent it has
in Ireland, but if unemployment remains at or above 25% Greece should
get even more competitive. Instability and unwise Troika
interventions may delay the process, but eventually the tourists will
come. The Eurozone does contain a natural correction mechanism: it is
just slow and painful.

If this does
eventually lead to sustained growth in Greece, it does not excuse
what has gone before: recoveries do not justify recessions, and
government profligacy does not have to imply a 25% fall in GDP!
However this correction mechanism is not bound to succeed, if it is
countered by another dynamic, which is one that has been and
continues to be imposed by the Troika. That dynamic is austerity
chasing primary surpluses when that austerity makes the economy
shrink. Macromodels would probably tell us which dynamic will win
out, but they will not factor in a deterioration in the financial
position of banks (already not good as Frances Coppola points
out) as the economy stagnates, and the deteriorating
social and political situation that austerity brings.

So the eventual
outcome still depends on the decisions of the Troika. It always has
of course. The truth that their apologists find so uncomfortable is
that the Troika has been in charge of the economy since 2010, and
therefore is responsible for the mess we are now in. The idea that
all would be well if only Greece had undertaken every item of
structural reform they specified (and a lot was done) is just
silly. Now it appears as if it is all the fault of the
former Greek finance minister, because he dressed funny, or kept
wanting to talk about economics, or did
some contingency planning - it is so absurd
you couldn’t make it up.

One ray of hope
offered
by Anatole Kaletsky is that now “ritual humiliation” has been
achieved, the Troika will be more forgiving. I wish he was right, but
this argument fails to account for the German finance minister who
clearly believes that exit is the best option. He wants the bus to
crash for the sake of the other cars on the road. An optimistic view
would be that the shock [1] of what was done to Greece a few weeks ago
will bring others to their senses, and Schäuble’s influence on the
Eurogroup (and strangely the IMF) will decrease.I fear the larger truth is that the non-German bloc in
the Eurozone does not have an alternative economic vision to offer
(although it clearly exists),
and will never face Germany down.

Tuesday, 28 July 2015

Someone wrote to me the other day to complain that my posts
were always negative in tone. I understand where they were coming from, as
there is a lot going on here in Europe to be negative about. However just to
show that I can do positive, here is how the next few years could be relatively
cheerful ones for the UK economy.

The important point about today’s GDP figures, showing
0.7% quarter on previous quarter growth (not annualised), is that this has
happened despite what looks like being a relatively poor quarter for
employment. The combination means that UK labour productivity growth may have
finally resumed after its six year pause. This while nominal wage growth shows
clear signs of increasing.

What we could be seeing is an investment led UK recovery. It
all goes back to my favourite explanation for the UK’s productivity puzzle:
that after the recession, high unemployment (both in the UK and Eurozone) pushed
down UK wages, which led firms to put investment that would have led to labour
productivity growth on ice, and just employ more people instead. (There may
also have been direct labour for capital substitution of the kind beloved by macroeconomists.) With reasonable growth in demand this generated rapid employment
growth, cutting the unemployment that helped cause stalling productivity.

It was my favourite productivity puzzle story, not because I
was sure it was right, but because it was optimistic. It was optimistic
because, as unemployment fell and labour shortages began to become common, the
process would stop and investment would resume. Provided demand continued to
increase, both actual growth and growth in productivity might continue above
trend and we would find that at least some of that output which pessimists
thought was lost forever after the recession would return. I also thought there
were some grounds for this optimism: stories about the pre-2007 trend being
artificially inflated by debt were, well, inflated, and productivity
innovations do not take six year holidays.

The caveat about demand remaining strong was crucial, of
course. Fiscal policy and you know who will not help beyond 2015, and neither
has the recent strength in sterling. However lower oil prices go the other way.
The big unknown is monetary policy. If nominal wages start rising before
productivity growth resumes, that would be a trigger for the MPC to start
putting on the monetary policy brakes too soon. They could still make that mistake,
of course, but rising productivity growth coupled with core inflation below 1%
should make them wait.

I should add in passing that if this does all happen, it in no
way excuses what has gone before. Strong growth after a long recession does not
make the recession OK! The cost in terms of lost output (at first compounded by
the costs of high unemployment) has been huge, and you know why I think much of
it could have been prevented.

I should also stress that this is an optimistic scenario, not a
forecast. I know enough about
unconditional macro forecasts not to do them. All manner of things could go
wrong. But if this is how things do pan out, it will not just be good news, but
it will also be fascinating from a macroeconomic point of view. It will show
how you can have a prolonged demand deficient recession without persistent high
unemployment, partly as a result of what economists call flexible labour
markets. This was always something that could happen in theory, but I’m not
sure we have many examples where it has happened. However, I should not allow
my optimism to count chickens before they are hatched.

Monday, 27 July 2015

Few disagree that the recent remarks on corporate governance and investment
made by Andy Haldane (Chief Economist at the Bank of England) are interesting,
and that if they start a debate on short-termism that would be a good thing. As
Will Hutton notes, Hillary Clinton has been saying similar
things in the US. The problem Tony Yates has (and which Duncan Weldon, the interviewer,
alluded to in his follow-up question) is that this is not obviously part of the
monetary policy remit.

Haldane gave an answer to that, which Tony correctly points out
is somewhat strained. Perhaps I could illustrate the same issue by going down a
better route that Haldane could have used. He could say that the causes of low
UK productivity growth are clearly under his remit, and one factor in this that
few dispute is low investment. If he was then asked by an interviewer what
might be the fundamental cause of this low investment, Tony would argue that
his reply should be that he couldn’t really comment, because some of those
reasons might be too political.

I have in the past said very similar things to Tony when
talking about the ECB, and their frequent advice to policymakers on fiscal
rectitude and structural reforms. My main complaint is that the advice is
wrong, and I puzzle over “how the ECB can continue to
encourage governments to take fiscal or other actions that their own models
tell them will reduce output and inflation at a time when the ECB is failing so
miserably to control both.” But I have also said that in situations where fiscal actions
have no impact on the ability of monetary policy to do its job (which is not
the case at the moment), comments on fiscal policy are “crossing a line which
it is very dangerous to cross”.

However I am beginning to have second thoughts about my own and
Tony’s views on this. First, it all seems a bit British in tone. Tony worked at
the Bank, and I have been involved with both the Bank and Treasury on and off,
so we are both steeped in a British culture of secrecy. I do not think either
of us are suggesting that senior Bank officials should never give advice to
politicians, so what are the virtues of keeping this private? In trying to
analyse how policy was made in 2010, it is useful to have a pretty good idea of
what advice the Bank’s governor gave politicians because of what he said in
public, rather than having to guess. (Of course private advice to politicians
is never truly private, but this hardly helps, because with secrecy it allows
politicians to hint that advice of a particular kind was given when it might
not have been.)

The issues of MPC external member selection that Tony worries
about are real enough, but perhaps that illustrates problems with the selection
process. My guess is that the Treasury would be inhibited about choosing an MPC
member who had previously been strongly critical of the government on other
issues anyway. As I said my main complaint about the ECB is the nature and
context of the advice they give, and at least by making it public we know about
this problem.

It is often said that central bankers need to keep quiet about
policy matters that are not within their remit as part of an implicit quid pro
quo with politicians, so that politicians will refrain from making public their
views about monetary policy. Putting aside the fact that the ECB never got this
memo, I wonder whether this is just a fiction so that politicians can inhibit
central bankers from saying things politicians might find awkward (like fiscal
austerity is making our life difficult). In a country like the UK with a well
established independent central bank, it is not that clear what the central
bank is getting out of this quid pro quo. And if it stops someone with the wide
ranging vision of Haldane from raising issues just because they could be deemed
political, you have to wonder whether this mutual public inhibition serves the
social good.

Sunday, 26 July 2015

Here F could stand for folk. The story that is often told by
economists to their students goes as follows. After Phillips discovered his
curve, which relates inflation to unemployment, Samuelson and Solow in 1960
suggested this implied a trade-off that policymakers could use. They could
permanently have a bit less unemployment at the cost of a bit more inflation.
Policymakers took up that option, but then could not understand why inflation
didn’t just go up a bit, but kept on going up and up. Along came Milton
Friedman to the rescue, who in a 1968 presidential address argued that
inflation also depended on inflation expectations, which meant the long run
Phillips curve was vertical and there was no permanent inflation unemployment
trade-off. Policymakers then saw the light, and the steady rise in inflation
seen in the 1960s and 1970s came to an end.

This is a neat little story, particularly if you like the idea
that all great macroeconomic disasters stem from errors in mainstream
macroeconomics. However even a half awake student should spot one small
difficulty with this tale. Why did it take over 10 years for Friedman’s wisdom
to be adopted by policymakers, while Samuelson and Solow’s alleged mistake
seems to have been adopted quickly? Even if you think that the inflation
problem only really started in the 1970s that imparts a 10 year lag into the
knowledge transmission mechanism, which is a little strange.

However none of that matters, because this folk story is simply
untrue. There has been some discussion of this in blogs (by Robert Waldmann in
particular - see Mark Thoma here), and the best source on this is another
F: James Forder. There are papers (e.g. here),
but the most comprehensive source is now his book, which presents an exhaustive study of
this folk story. It is, he argues, untrue in every respect. Not only did
Samuelson and Solow not argue that there was a permanent inflation unemployment
trade-off that policymakers could exploit, policymakers never believed there
was such a trade-off. So how did this folk story arise? Quite simply from
another F: Friedman himself, in his Nobel Prize lecture in 1977.

Forder discusses much else in his book, including the extent to
which Friedman’s 1968 emphasis on the importance of expectations was
particularly original (it wasn’t). He also describes how and why he thinks
Friedman’s story became so embedded that it became folklore. The reason I write
about this now is that I’m in the process of finishing a paper on the knowledge
transmission mechanism and the 2010 switch to austerity, and I wanted to look
back at previous macroeconomic crises.

If it wasn’t a belief in a long run inflation unemployment
trade-off, what was it that allowed inflation to gradually rise during those
two decades? Forder has a lot to say on this, but the following is my own take.
I think two things were critical: the idea that demand management was primarily
designed to achieve full employment, and that full employment had primacy over
the objective of price stability. Although more and more economists over that
period began to see the policy problem within a Phillips curve framework, many
still hoped that other measures like prices and incomes policies (in the UK in
particular but also in the US) could override the Phillips curve logic. The
primacy of the full employment objective meant the problem was often described
as ‘cost-push inflation’ rather than a rise in the natural rate of
unemployment.

If you find this hard to imagine, think about historians
discussing the current period in a possible
future in 2050. By then nonlinearities in the Phillips curve and the power the
inflation target had in anchoring inflation expectations were firmly entrenched
in mainstream thinking. Imagine that partly as a result in 2050 the inflation target has been replaced by a level of nominal income target. With the benefit of
hindsight these historians were amazed to calculate the extent to which
resources were lost decades earlier because policy had become fixated by a 2%
inflation target and budget deficits. They will recount with amusement at the
number of economists and policymakers who thought that the way to deal with
deficient demand was by ‘structural reform’. Rather than construct folk tales,
they will observe that even when most economists realised what was required to
avoid being misled again policymakers were extremely reluctant to change the
inflation target.

Friday, 24 July 2015

The UK budget included the creation of an employer levy to help
finance a large increase in apprenticeships. It is a key part of this
government’s belated
attempts to deal with poor productivity growth, although lack of workforce
skills has been a UK problem for as long as I can remember. I hope the goals
are achieved, but this is not my area so I cannot comment on whether they will
be. Instead let me tell an anecdote, and reference two good sources.

After I left H.M.Treasury, I found myself in a forum discussing
Mrs. Thatcher’s economic policies. The person defending the government was a
Treasury economist that I had worked for, and who was no fool. Most of the
questions raised were macro, so I had no problem making critical comments. But
then a question on apprenticeships came up. In the 1970s there was an
apprenticeship levy covering most of British industry, administered by
tripartite bodies. The Thatcher government had just begun dismantling that
levy.

As this was hardly my field, I feared I would have nothing to contribute.
But all my former colleague could say to defend the government’s dismantling of
the levy system was that the government believed that individual employers were
far better placed to do their own training. I could not believe what I was
hearing. Even with the little microeconomics I had, I could see the flaw in
that argument. Training employees with non-firm specific skills involved an
obvious problem for the employer - the employee can be tempted to move to
another firm, and the original firm gets nothing back from their investment.
Firms that did pay for apprenticeships would always be vulnerable to others
that attempted to free ride and poach their skilled labour.

Yet this ‘why should governments interfere’ mantra was the only
justification the government could find for getting rid of the levy. Mrs
Thatcher’s policies might have improved UK productivity growth for some
reasons, but this was not one of them. As I often say, a neoliberal agenda (or
whatever else you want to call it) is anathema to economics, a large part of
which is about market imperfections, and how governments can sometimes be
instrumental in fixing them. (Not always, as perhaps the German approach to
apprenticeships illustrates.)

Two good recent pieces on apprenticeships are this short piece from Hilary Steedman, and something more detailed from Alison Wolf.

Thursday, 23 July 2015

It is fascinating when two highly respected, internationally known economics
professors at London universities (LSE and UCL) disagree about a policy on which they are both experts. The policy is
the increase in the national minimum wage (NMW) contained in the last Osborne
budget. The disagreement is not the one you might expect, and nor do I think it
reflects underlying differences (if any) in the politics of the two
individuals.

The debate is often between those who appeal to standard theory
that says raising the NMW must reduce employment, and those who appeal to the
evidence which says this hardly happens. But in this case the theorist, Alan
Manning, is arguing for the policy of a higher NMW, while
it is the empiricist, Steve Machin, who disapproves of the policy.

Let’s start with Machin. As well as having published work on
the impact of minimum wages, he also sits on the Low Pay Commission (LPC) which
before the budget was responsible for setting the minimum wage. In a letter to
the FT, together with another academic member of the LPC Robert Elliot, he writes:

“The path of the NMW has until now been determined by careful
and considered recourse to the evidence. The chancellor has at a stroke removed
the rationale for the LPC and ensured that the path of the NMW will be
determined by the priorities of whichever party forms a government.”

Although the argument here is essentially about the
politicisation of setting the NMW, you could argue that he is also implicitly
suggesting that by setting a NMW substantially above levels recommended by the
LPC Osborne will do more harm than good.

Alan Manning is a pioneer of the theory of monopsony applied to
the labour market. The idea here is that the employer has considerable power
over the employee. The example normally given is that of a large employer in a
small town, where the opportunities to the employee to find alternative work
are limited or very costly. However Manning argues that monopsony is more
generally applicable. In his book on the subject he writes

“The existence of [labour market] frictions gives employers
potential market power over their workers. The assumption that firms set wages
means that they actually exercise this power.”

The kind of frictions he has in mind are the time, effort and
costs involved in finding a new job. Of course the employer faces similar
costs, but Manning argues they matter more to the worker than to the firm. This
means that wages can be above or below the level they would be under perfect
competition with no frictions, and the greater power of the firm means that in
practice they will be below. As a result, the outside imposition of a higher
wage will not necessarily lead to lower employment, but may simply alter the way
the ‘rent’ caused by labour market frictions is split between employee and
employer. [1]

This theory does not, of course, suggest that minimum wages can
be set without limit, but Alan Manning is suggesting that the evidence is not
strong enough to say that Osborne’s proposal goes beyond those limits. He does
not pretend to know that the LPC has been wrong to set a lower NMW. Instead he
argues that sometimes it is good to experiment. He writes:

“Evidence-based
policymaking does require experimentation with policies whose effects are
unknown otherwise one simply preserves the status quo. It is as important to
try new policies that one thinks have benefits as to have stringent ex-post
analysis of those policies. I think the new policy is one well worth trying but
I don’t pretend to know that there will be no substantial adverse effects.”

He argues
that this experiment will give the LPC a new lease of life as it evaluates the
results of the experiment.

I have no
clear idea who is right. However we can make some progress by looking at which
industries employ most on low pay. James Plunkett has a nice diagram here, and he argues that most sectors
can easily afford to pay higher wages without reducing employment (or more
precisely, that at the moment the rents that come from labour market frictions
are mostly taken by the employer): sectors like retail or food and beverage
services. An exception is residential care, but as he and Manning note, the
price for these is largely determined by the government.

I agree with
Machin that it is good to delegate complex economic issues like setting the NMW
to expert bodies like the LPC. However it is also difficult to imagine such
institutions ever saying why don’t we take a risk and do an experiment. It is
also significant that the political intervention in this case does not fit the
natural inclinations of the political party in power. In this case who turns
out to be right will depend on whether this intervention is a one off or
becomes a habit, and the reaction of whoever is Chancellor if the LPC judges
the experiment to have failed.

[1] An alternative argument is that both employer and employee
will reap benefits from higher wages, because these will encourage higher
retention and productivity. These efficiency wage arguments are discussed by Ben Chu.

Tuesday, 21 July 2015

Even the seasoned political commentators who are sympathetic to Labour
cannot understand the reported popularity of Jeremy Corbyn, the left wing
candidate for the Labour Party leadership. Perhaps those party members with
more centrist views have left during Miliband’s leadership, they muse, leaving
constituency parties dominated by the far left. These commentators may be right
that if Corbyn was elected it would be electorally disastrous for Labour, but
in failing to correctly understand his relative popularity they show how
dangerous the Westminster bubble has become. It is not Labour party members who have changed, but the position of most of their potential leaders.

If you want to see the tragedy of what is currently happening
to Labour, you just need to look at the Welfare Bill that was debated in
parliament yesterday. This bill

●repeals most of the Child Poverty Act, and in
particular abandons poverty reduction targets

●tightens the ‘benefits cap’, the total amount a family
can receive in benefits

●extends the freeze on working age benefits for the next
four years

●limits child tax credits (subsidies for the low paid)
to the first two children

Although Labour tabled amendments to this bill, after those
were inevitably defeated it abstained rather than voting against. Of the four
leadership candidates, only Corbyn defied this party line.

Labour did not vote against this bill despite the inevitable
result that it will increase child poverty. Indeed, an apt title for this bill
would be the ‘Increasing Child Poverty’ bill. One of the great achievements of
the last Labour government was to reduce child poverty, largely through the
system of tax credits, and today’s Labour party has abstained on a bill that
will set about dismantling and reversing that.

I doubt if any Labour Party members think now is the time to
start increasing child poverty. They wanted child poverty reduced under the
last Labour government, and with the number using foodbanks in the UK
rocketing, they hardly think now is the time to reverse that. For many party
members reducing poverty is a core Labour value - it is one of the reasons they
joined.

So why on earth did Labour not vote against this bill? The main
reason Labour gives is that they must ‘listen to the electorate’. Measures to
‘reduce welfare’ are popular among voters. It is popular because voters
constantly see stories in the press and TV about people living the ‘benefits
lifestyle’, and justifiably resent that. This is what people mean by ‘reducing
welfare’. But if you ask people about child poverty, they overwhelmingly believe that it should be a
government priority to reduce it. There are not stories about the hardship that
poverty causes every day in the media, and how the welfare system is vital in
preventing even worse. So welfare is associated with supporting scroungers
rather than reducing poverty.

The other excuse often given by Labour MPs for supporting
measures of this kind is that they need to show they are competent to run the
economy, which alas nowadays means reducing the deficit. Yet we know there is no macroeconomic logic in reducing the deficit
as rapidly and as far as Osborne plans. Again Labour appeal to what voters
believe, never mind the reality. In addition, this government is cutting
inheritance tax for the better off. So not opposing this welfare bill is
equivalent to saying that the children of the poor must pay so that the rich
can pass on more of their wealth.

This electoral strategy of moving the party to the right by
abandoning its core values seems doomed to failure. Unless the plan is to outdo
the Conservatives in dismantling the welfare state, Labour will always be seen
as ‘soft on welfare’ by the electorate. Even if they voted with the government
on every single deficit reduction measure, the Conservatives will still argue
that Labour’s claims to be competent at running the economy are not credible,
and use the unchallenged assertion that Labour caused austerity as evidence. In
addition, following the Conservatives to the right is potentially suicidal
because it takes for granted that those on the left will continue to vote for
them.

If you want to know the disaster that can befall those who
follow this ‘a bit to the left of the Conservatives’ strategy, look at what
happened in Scotland, and look at what happened to the Liberal Democrats.
However it would be very foolish to think that the LibDems are no longer
important in UK politics. Their new leader, Tim Farron, will undoubtedly try
and fill the void that Labour leaves on the centre left, and I think he has
every chance of succeeding. His party voted against the ‘Increasing Child
Poverty’ bill. He said

“The truth is the Tories do not have to cut £12bn from welfare:
they are choosing to. The Liberal Democrats will always stand up for families.
We will not let the Conservatives, through choice, and the Labour party,
through silence, unpick our welfare system."

I’ve also seen it reported that he said he would have attended
the recent anti-austerity march. If he campaigns against what he could call
Osborne’s ‘excessive and obsessive austerity’, his eclipse of Labour on the
left is assured. For those who think that poverty should be reduced and the
rise in food banks is an indication of social failure, it will be pretty
obvious who to vote for in 2020.

Sunday, 19 July 2015

Ireland is often regarded as a success story for Eurozone
austerity, compared to the total failure of Greece. That can lead to nonsense
like this: instead of whingeing, the Greeks should
buckle under and get on with it as Ireland has done. An alternative narrative
is to explain the different experience of the two economies by looking at
structural factors, as in these two examples.

Whether you can describe Irish unemployment rising from 12% in
2009 to 14.7% in 2012 as a success is of course moot. But Ireland does give us
a clear example of how austerity is supposed to impact an open monetary union
member, according to standard theory. A permanent reduction in government
spending or higher taxes will increase unemployment, which will reduce wages
and prices. This will improve competitiveness, leading to higher external
demand for Ireland’s products (and less imports) which will eventually replace
the lost demand due to austerity. However, because wages and prices are
‘sticky’, this adjustment will not happen quickly.

The fact that Ireland is now growing strongly and unemployment
is falling reflects this process. The OECD estimates that growth in 2014 was
nearly 5%, and this was greatly helped by a 12% increase in the volume of
exports. In this sense Ireland’s response to austerity has been textbook. The
interesting question is why Greece has been so different. Here is growth in the
two economies (all data comes from the OECD’s Economic Outlook). .

Of course the 2009 recession affected everyone, but from 2010 until
2014 the Irish experience was bad, but for Greece it was a disaster.

The most important reason for the difference is
straightforward: there has been a lot more austerity in Greece. Here is one
summary measure: the underlying government primary surplus.

Looking at this measure the fiscal contraction between 2009 and
2013 in Greece has been 2.7 times greater than in Ireland. This measure is not
ideal because the impact of tax changes can be smoothed, but looking at changes
to government consumption gives a similar picture.

In both cases we have had what economists call ‘internal
devaluation’, which is the improvement in competitiveness that I described
earlier. Here is what has happened to wages.

The fall in wages in Ireland produced a significant improvement
in competitiveness, which is a major factor behind why exports are now booming.
With much more, and more persistent, unemployment in Greece, the fall in wages has
been much more persistent. So we would expect a much larger and more persistent
improvement in competitiveness and exports. But here we have a small puzzle:
neither has happened. Here are export volumes in both countries.

The pattern is similar, but if anything the improvement in
exports has been greater in Ireland than Greece.

Is this where stories of structural weaknesses in Greece come
in? In one sense yes. Greece certainly exports less than you might expect given
the usual (‘gravity’) models that economists use to explain such things, as this European Commission study shows. The
study also argues that you can explain this finding by institutional weaknesses
in Greece’s economy. That in turn is one factor behind a very important
difference between Ireland and Greece. Ireland is much more open, which means
that any percentage increase in exports will have a much bigger impact on GDP
and employment than in Greece. (It also receives much more foreign direct
investment.) In technical terms, if the
slope of the Phillips curve is similar in both countries, Greece’s adjustment
was always going to be more difficult, because it is a much less open economy.

However it is not clear why these structural differences should
make Greek exports less responsive to any change in wages. What appears to
explain this puzzle is that competitiveness in Greece has improved much less
than in Ireland, even though the fall in wages has been greater. Theodore
Pelagidis at Brookings has an explanation: other non-labour costs have gone
up to offset these lower labour costs, particularly energy prices. He writes:

“part of the adjustment program Greece had proceeded to significantly
increase excise taxes on energy used in productive activities…..The resulting
evolution of exports in energy intensive sectors like steel and textiles is
most revealing. In spite of the large fall in wages, the rapid increase in
energy costs meant that exports of these commodities, price takers on the
international market, plummeted…..These two sectors largely account for the stagnation
of Greek non-fuel exports”

To what extent these increases in energy taxes were sanctioned
by the Troika is unclear. However one of the measures imposed as part of the latest agreement is an
increase in VAT for the tourist industry, which of course will also hit
competitiveness in that industry. In both these cases, austerity measures have
and will actively hinder the way the economy adjusts to fiscal consolidation.

To sum up, the main reason Greece has suffered so much more
than Ireland is that the amount of austerity imposed on Greece has been much
greater. Any recession is also likely to be greater because Greece is a less
open economy, so a larger internal devaluation is required to offset the impact
of austerity. One final factor is that large cuts in wages have not been
translated into improvements in competitiveness, in part because of the way austerity
was implemented.

Friday, 17 July 2015

My recent post on this was in one way generous to some
Labour party figures. It assumed that they knew that George Osborne’s ‘going
for surplus’ was a bad policy, but felt they had to follow it to regain
credibility in handling the nation’s finances.

However there is an alternative and more straightforward
explanation for Labour politicians proposing to follow Osborne’s policy, and
that is that they do not know it is a bad policy. Some evidence for the second
explanation is provided by this recent speech by Tristram Hunt. He is not trying to
resurrect Blairism, as he agrees with Miliband that tackling inequality has to
be at the core of Labour’s mission. But on fiscal policy it is hopeless. Here
is one particular excerpt:

“the economy is growing and the deficit stands at around five
per cent. Even John Maynard Keynes would
be arguing for retrenchment in this context.”

The idea that because the economy is growing we should be
having fiscal retrenchment makes the schoolboy error of confusing levels and
rates of change, and this is certainly not an error that Keynes would have
made. In the 1920s and 1930s, when UK unemployment was never below 6% and often
much higher, UK growth was often positive and sometimes strong - was that a
good time for fiscal retrenchment? Tristram Hunt was originally a lecturer in
modern British history, so maybe is unaware of this letter from Keynes to Roosevelt after the
disastrous US return to austerity following strong growth in 1937.

Putting Keynesian issues to one side, Tristram Hunt repeats the
idea that fiscal retrenchment is sensible because of the amount that the
government pays in debt interest. Paying debt interest may be costly because of
the distortions created by the taxes needed to pay it (or the missed opportunities for public spending), but taxes also have to
rise (or spending to fall) to reduce debt. As I discussed here, a recent paper from the IMF makes it
clear that this is not a good argument for austerity.

All of which raises an intriguing question. Where is this
nonsense economics coming from? Tristram Hunt makes many of the same mistakes
as Chuka Umunna made in a speech I also criticised
– is that coincidence? I cannot believe that any academic economist, whatever
their views on fiscal rules, would make errors as obvious as these. Are they
simply parroting stuff that comes from the Conservative Party, which is
repeated in much of the press? Does it come from some City economist? If anyone
knows, please tell me (confidentially by email if necessary).

Thursday, 16 July 2015

As Tony Yates among others has observed, antagonism towards using fiscal
policy for macroeconomic stabilisation seems to be an essential part of market
monetarism. However their argument is not that fiscal policy will have no
impact on demand and therefore output, but rather that monetary policy can
always offset this impact. This can be called the ‘monetary offset’ argument.

As I have noted before, the idea of monetary offset is
actually a key part of Keynesian objections to austerity in a liquidity trap
[1]. In a liquidity trap monetary policy’s ability to offset fiscal austerity
is severely compromised, but at other times it can be done. It therefore makes
much more sense to postpone austerity until a time when monetary offset is
clearly possible. So the idea that monetary offset can happen is common ground.
What is in dispute is the extent to which a liquidity trap (or almost
equivalently the fact that nominal interest rates cannot become too negative)
prevents complete monetary offset.

If empirical evidence could be found that complete monetary
offset has operated during a liquidity trap that would be powerful support for
the market monetarist case. Scott Sumner recently presented
(HT Nick Rowe) some analysis by Mark Sadowski
which he said did just that. Taking the cyclically adjusted primary balance as
a measure of fiscal policy, it showed that there was no correlation between
this and growth in nominal GDP in the single period from 2009 to 2014 for those
countries with an independent monetary policy.

There are tons of problems with simple correlations of this
kind, some of which I discuss here, which is why quite elaborate econometric
techniques are nowadays used to assess the impact of fiscal policy. But there is a
rather simpler problem with this correlation. As far as I know, no one had
expressed a concern about fiscal austerity because of the impact this will have
on nominal GDP. The issue is always the impact on real activity, for reasons
that are obvious enough.

So what happens if we relate fiscal policy to real GDP growth,
using Sadowski’s data set? Here is the answer.

There are two obvious outliers here: at the top Singapore, and
to the right Iceland. Exclude those and we get this.

There is a clear negative correlation between the extent of
fiscal tightening and the amount of real GDP growth. Strange that Sumner gave
no hint of this :)

Do I think this is definitive evidence? No, for two reasons. First,
the obvious problems with simple correlations of this kind noted earlier.
Second, this sample includes quite a few countries where interest rates over
this period have averaged over 2% (Australia, Norway, New Zealand, and Korea)
and so are unlikely to be subject to a liquidity trap. Others may only have
been in a liquidity trap for a part of this period. What we can say is that
these correlations are perfectly consistent with the view that austerity
reduces growth in countries with an independent monetary policy. [2]

If you were to conclude that we just do not have enough data to
know to what extent monetary offset can operate in a liquidity trap, I think
you would be right. If you then went on to say that therefore the data cannot
discriminate between the two sides in terms of policy, you would be wrong. What
market monetarists want you to believe is that there is no need to worry about
fiscal austerity in a liquidity trap, because an independent monetary policy
can and will always offset its impact. This is wrong, precisely because the
empirical evidence is so limited. We know, both from theory and the great
majority of econometric studies, that fiscal contraction has a fairly
predictable impact in reducing GDP. We have virtually no idea how much
unconventional monetary policy is required to offset this impact. Given lags,
that means trying to achieve monetary offset in a liquidity trap is always
going to be hit and miss. The moment you think about uncertainty, the market
monetarist argument for not worrying about austerity in a liquidity trap falls
apart.

[1] It is not the only reason why fiscal austerity in a severe
recession might be a bad idea. There is a lot of empirical evidence that the
impact of austerity is greater in recessions than when the economy is stronger,
and there are other theoretical reasons besides monetary offset why that may be
the case. This is of some importance for individual economies in a monetary
union.

[2] If the coefficient on fiscal policy was lower for this
sample than for Eurozone countries (I’ve not tried), would that at least be
evidence for some monetary policy offset? The trouble here is that some of the
countries driving the EZ results were also suffering from an overvalued real
exchange rate as a result of earlier excess demand, and so this might bias
upwards the coefficient on fiscal policy in those regressions.

Wednesday, 15 July 2015

A constant refrain from those who help make Labour party policy
goes like this. I know what you economists say makes sense, but we tried that
policy at the last election, and failed horribly. We have to listen to what the
people are telling us.

So, for example, we cannot oppose George Osborne’s deficit
plans, because we tried that at the last election and lost. We cannot talk
about the problem of rent seeking by the 1%, because we tried that and it was
seen by voters as anti-aspiration. We cannot argue for a higher minimum wage
because that will be seen as anti-market and anti-business - oh wait.

I would draw exactly the opposite conclusion from the election
result. On the deficit Labour tried to avoid discussion, and let the
Conservatives spin the idea that austerity was the last Labour government’s
fault. By failing to challenge both this nonsense [1], and the austerity policy
enacted in 2010 and 2011, and the austerity policy proposed after 2015, in terms of perception it adopted the
Conservative policy on the deficit. [2] That was why it lost heavily.

Some will say that come the next election the government will
be running a budget surplus anyway, so why oppose the process of getting there?
The answer to that is aptly illustrated by Labour’s decision not to oppose
Budget plans to limit child tax credits to the first two children, or plans to
reduce the benefit cap. Both are terrible policies, and it is incredulous that
Labour is not opposing them. But once you concede the need for austerity, it
becomes much more difficult to oppose the measures that come with it.

Another argument is that Labour has to accept Osborne’s surplus
target, because nothing else will stop Labour being accused of being fiscally
spendthrift. (See Hopi Sen for example - HT Simon Cox ‏@s1moncox)
This just sounds politically naive. George Osborne (as Chancellor or PM) will
not suddenly drop the spendthrift argument just because Labour adopts his
plans. Instead the argument will change to focus on credibility. He will say:
Labour now admits that it was spendthrift in government, and in opposition it
has changed its mind so often, you just cannot believe what they say – so any
future Labour government will be as spendthrift as the last.

Others will respond to the above by saying how can you argue
Labour lost because it was not left wing enough! But challenging austerity is
not ‘left wing’, it is just good macroeconomics. The idea that opposing
austerity, or advocating less inequality, is akin to what Labour did between 1979 and 1983
is absurd.

If there are examples to draw from, it is to see how your
opponents succeeded where you failed. The Conservatives did not regain power in
2010 by moving their policies to the left. They did it by changing their image.
Until a couple of years before 2010 they had promised to match Labour on
spending. But when circumstances changed, they seized their chance to change
policy and focus on the deficit. It was a smart move not because of the
economics, but because of how it could be spun.

In 2015, the SNP saw that times had changed compared to 2010.
The idea that we might become like Greece was no longer credible, and voter
attitudes on the deficit were much
more divided. So they campaigned against austerity, and partly as a result
wiped Labour out. (Their actual policy proposals were not very different from
Labour, but unfortunately few voters look at the numbers: it is perception that
matters.)

The lesson is that when the external environment changes, you
try to exploit this change in a way that enhances the principles you stand for
and gains you votes. As the deficit falls, putting this at the centre of policy
will seem less and less relevant. In contrast, the costs of austerity and
rising poverty that are the result of ‘going for surplus’ will become more and
more evident. Osborne, by going for an unnecessarily rapid reduction in debt by
means of increasing poverty, has thrown a potential lifeline to Labour.
Unfortunately, Labour appear to be swimming away from it.

[1] Chuka Umunna
writes: “Some economists reject this [supporting
going for surplus] approach as it would, in their view, necessarily entail simply
capitulating at the feet of George Osborne. In their view all we need to do is
– in ever more strident and louder terms – shout back at the electorate that it
was not profligacy on the part of the last Labour government that caused the
crash, but a banking crisis. And, in respect of borrowing, far from
acknowledging that we understand the need to reduce national debt, we need to
enthusiastically go about making complex arguments for different types of
borrowing. Do this and the public will see the light.”

I guess I am one
of those economists. I would respond that Labour in 2015 made no attempt to seriously
debate this issue, let alone shout about it. The only people challenging
the myth that Osborne and much of the media were telling were ‘some
economists’. I do not think it is ‘complex’ to argue that you should
borrow to investment when interest rates are low, and I think this argument can
be effective - which is why Cameron called
the people making it dangerous voices.

[2] The SNP saw
that Labour were endorsing the importance of deficit reduction, and exploited
this by arguing against austerity.

Tuesday, 14 July 2015

Nick Rowe pulls me up on a point that I didn’t make in my account of what should have happened to
Greece after 2010. I argued that some external body (e.g. IMF) should lend
sufficient money for Greece to be able to achieve primary surplus (taxes less
non-interest government spending) gradually,
thereby avoiding unnecessary unemployment. Gradual adjustment is required
because the improvement in competitiveness required to achieve ‘full
employment’ with a primary surplus cannot happen overnight because of price
rigidity.

Nick’s point is that for this to happen, the external body has
to have a degree of trust in Greece: trust that it will not take the money and
at some stage default on this new loan. This trust may be particularly
problematic if Greece had defaulted on its original debt, which I think it
should have done. This, after all, is one reason why Greece would not be able
to get such finance from the markets.

This is what the IMF is for.
Governments are more reluctant to upset the international community, and so
defaults on IMF loans are rare. As Ken Rogoff writes: “Although some countries have gone
into arrears, almost all have eventually repaid the IMF: the actual realized
historical default rate is virtually nil.”

But does this help explain why other Eurozone countries keep
going on about how Greece has lost their trust? I think the answer is a clear
no. In fact I would go further: I think this talk of lost trust is largely
spin. The issue of trust might have explained the total amount the Troika lent
from 2010 to 2012. However, as I have said often, the mistake was not that the
total sum lent to Greece was insufficient, but that far too much of it went to
bail out Greece’s private sector creditors, and too little went to ease the
transition to primary surplus. (The mistake is hardly ever acknowledged by the Troika’s
supporters. Martin Sandbu discusses the - misguided - reasons for that
mistake. [0])

The reason the Troika give for lack of trust is that Greece has
repeatedly ‘failed to deliver’ on the various conditions that the Troika
imposed in exchange for its loans. The Troika has tried to micromanage Greece
to such an extent that there will always be ‘structural reforms’ that were not
implemented, and it is very difficult to aggregate structural reforms. However
this is exactly what the OECD tries to do in this document, and if I read Figure 1.2 (first
panel) correctly, Greece has implemented more reform from 2011 to 2014 than any
other country. [1] We can more easily quantify austerity, and here it is clear
that Greece has implemented almost twice as much austerity as any other
country. [4] The narrative about failing to deliver is just an attempt to disguise
the fact that the Troika has largely run the Greek economy for the last five
years and is therefore responsible for the results. [3]

You could argue with much more justification that the failure
of trust has been on the Troika’s side. Greece was told that the austerity
demanded of it would have just a small impact on growth and unemployment, and
the Troika were completely wrong. They were then told if they only implemented
all these structural reforms, things would come good, and they have not. You
could reasonably say that the election of Syriza resulted from a realisation in
Greece that the trust they had placed in the Troika was misguided.

Given these failures by the Troika, a reasonable response to
the election of Syriza would have been to acknowledge past mistakes, and enter
genuine negotiations. [2] After all, as Martin Sandbu points out in a separate piece, a pause in austerity in 2014 had
allowed growth to return, and because Greece had achieved primary surplus new
loans were only required to repay old loans. But it is now pretty clear that large parts of the Troika never had
any real wish to reach an agreement. Over the last few months we were told (and
the media dutifully repeated) that the lack of any agreement was because the
‘irresponsible adolescents’ of Syriza did not know how to negotiate and kept
changing their minds. We now know that this was yet more spin to hide the truth
that large parts of the Troika wanted Grexit.

The lesson of the last few months, and particularly the last
few days, is not that Greece failed to gain the trust of the Troika. It is that
creditors can be stupidly cruel, and when those creditors control
your currency there is very little the debtor can do about it.

[0] Greece was prevented from defaulting because of fears of
contagion of one kind or another, which meant that Greece was taking on a
burden for the sake of the rest of the Eurozone. The right response to these
fears was OMT, and direct
assistance to private banks, as Ashoka Mody explains clearly here.
But given that this was not done, what should have then happened is that once
that fear had passed, the debt should have been written off. But politicians cannot
admit to what they did, so the debt that was once owed to private creditors
and is now owed to the Troika remains non-negotiable.

[1] The Troika can also speak with forked tongues on this
issue: see Mean Squared Errors here (HT MT).

[2] I am often told that the Troika had to stand firm because
of a moral hazard problem: if Greek debts were written down, other countries
would want the same. But the moral hazard argument has to be used
proportionately. Crashing an economy to avoid others asking for debt reductions
is the equivalent of the practice in 18th century England of hanging
pickpockets.

[3] I am sometimes asked why I focus on the failures of the
Troika rather than the mistakes of Syriza. The answer is straightforward - it
is Troika policy that is the major influence on what happens in Greece. And
when the Troika gives Greece’s leaders the choice between two different disasters, it seems rather strange to focus on
the behaviour of Greece’s leaders.[4] Postscript: Peter Doyle suggests that, all things considered, Greece overachieved on fiscal adjustment

Sunday, 12 July 2015

Pandemonium erupted in
Congress yesterday as senators disagreed on how to deal with the subprime
problem. Borrowers are still finding it difficult to repay, despite the
government buying these mortgages from the banks seven years ago and imposing
strict conditions on the borrowers. Some senators favour continuing the program
of compulsory community service and self-improvement lessons, but now others in
the senate are openly talking about revoking the US citizenship of these
borrowers.

The Great Recession and the Eurozone crisis are normally
treated as different. Most accounts of the Great Recession see this as a
consequence of a financial crisis caused by profligate lending by - in
particular - US and UK banks. The crisis may have originated with US subprime
mortgages, but few people blame the poor US citizens who took out those
mortgages for causing a global financial crisis.

With the Eurozone crisis that started in 2010, most people tend
to focus on the borrowers rather than the lenders. Some ill-informed accounts
say it was all the result of profligate periphery governments, but most
explanations are more nuanced: in Greece government profligacy for sure, but in
Ireland and other countries it was more about excessive private sector
borrowing encouraged by low interest rates following adoption of the Euro.
Seeing things this way, it is a more complicated story, but still one that
focuses on the borrowers.

However if we see the Eurozone crisis from the point of view of
the lenders, then it once again becomes a pretty simple story. French, German
and other banks simply lent much too much, failing to adequately assess the
viability of those they were lending to. Whether the lending was eventually to
finance private sector projects that would end in default (via periphery
country banks), or a particular government that would end up defaulting,
becomes a detail. In this sense the Eurozone crisis was just like the global
financial crisis: banks lent far too much in an indiscriminate and
irresponsible way.

If borrowers get into difficulty in a way that threatens the
solvency of lending banks, there are at least two ways a government or monetary
union can react. One is to allow the borrowers to default, and to provide
financial support to the banks. Another is to buy the problematic loans from
the banks (at a price that keeps the banks solvent), so that the borrowers now
borrow from the government. Perhaps the government thinks it is able to make
the loans viable by forcing conditions on the borrowers that were not available
to the bank.

The global financial crisis was largely dealt with the first
way, while at the Eurozone level that crisis was dealt with the second way.
Recall that between 2010 and 2012 the Troika lent money to Greece so it could
pay off its private sector creditors (including many European banks). In 2012
there was partial private sector
default, again financed by loans from the Troika to the Greek government. In
this way the Troika in effect bought the problematic asset (Greek government
debt) from private sector creditors that included its own banks in such a way
as to protect the viability of these banks. The Troika then tried to make these
assets viable in various ways, including austerity. Two crises with the same
cause but very different outcomes.

Friday, 10 July 2015

Imagine that the Scottish National Party (SNP) had won the
independence referendum. The SNP starts negotiating with the remaining UK (rUK)
government over issues like how to split up national debt. On some issue the
negotiations get bogged down. Rumours start circulating that this might mean
that rUK will not form a monetary union with Scotland, and that Scotland might
have to create its own currency. People in Scotland start withdrawing money
from Scottish banks.

Now it is almost the definition of a private bank that if
everyone who has an account at the bank wants to withdraw their money, the bank
will run out of cash and go bust. That is why bank runs are so dangerous. It is
also why one of the key roles of a central bank is to supply an otherwise
solvent private bank with all the cash they need, so they will never deny
depositors their money. (To be a lender of last resort.) If they did not do this, anyone could start a rumour
that a bank was insolvent, and as people withdrew their cash just in case the
rumour was true, the bank would run out of money and go bust anyway.

So in my hypothetical story, as people started withdrawing cash
from Scottish banks, the Bank of England should supply these banks with all the
cash they need. Except suppose it did not. Suppose it put a limit to the amount
of cash it would supply. The Scottish banks would protest - you agreed we were
solvent before independence, they would say, so why are you rationing our
liquidity? The Bank of England replies that although they might have been
solvent before independence, if there is no agreement solvency is less clear.
The Bank of England says that the limit on cash will remain until the Scottish
and rUK government come to an agreement.

This announcement of course leads everyone in Scotland to try
and get their money out, and the Scottish Banks have to close. The Scottish
economy begins to grind to a halt. The English media report that Scotland is
running out of money because the Bank of England will not ‘lend’ any more to
the Scottish banks. The Scottish government is forced to agree to the rUK’s
terms. The English media say look what happens when you elect a radical
government. In Scotland they call it blackmail. What would you call it?

If it sounds to you like the Bank of England is taking sides
and putting impossible pressure on Scotland, then you will know what it feels
like in Greece right now. When, on 28th June, the ECB stopped providing
emergency funding to Greek banks, it took sides. Part of the ECB’s logic is that Greek
banks may be insolvent if there is no agreement between the Troika and Greece
(even though it is the Central Bank of Greece, and therefore the Greek people,
which stands to suffer losses from defaults by commercial banks).

Why should the failure to reach an agreement influence the
solvency of the Greek banks? Is it because without an agreement there would be
a Greek exit? But Greece does not want to abandon the Euro, and the other
Eurozone countries have no formal grounds to expel Greece. Greece will only
leave the Eurozone if the ECB stops supplying Euros. We reach exactly the same
self-fulfilling logic of a bank run. Is it because without an agreement the Greek government would default on some of its debts, and that might adversely influence the solvency of Greek banks? But the fact that the Greek government will not get money from the Troika to pay back the Troika seems to have no implications for the underlying solvency or either the Greek state or its banks. (Paul De Grauwe discusses this further.) If the Troika can make Greece insolvent by itself withholding money we have another self-fulfilling justification.

The real explanation for the ECB’s actions is much simpler.
Limiting funding on 28th June was the Greek government’s punishment for failing to agree to the Troika's terms and calling
a referendum the day before. The ECB was not, and never has been, a neutral
actor just following the rules of a good central bank. It has always been part
of the Troika, and right now it is the Troika’s enforcer.

As Charles Wyplosz recounts, this is not the first time the ECB
has chosen to bow to political pressure. There will be some on the left who
will say of course - what else do you expect of a central bank? In response,
let me go back to my hypothetical example involving Scotland and the Bank of
England. I may be wrong, but I think in that case the Bank of England would
have supplied unlimited cash to the Scottish banks. I may be naive, but I
believe it would have realised that to do anything else was an overtly partisan
political act, and recoiled from doing that. Just as I do not think it was
inevitable that the Eurozone committed itself to austerity, I also think it was
possible that the ECB could have been a more independent central bank. The
really interesting question is why it has turned out not to be such a
bank.